supply chain management location of inventory general idea: store as little inventory as possible...

Supply Chain Management

Location of Inventory

General Idea: Store as little inventory as possible while still being responsive to customer.

Approaches:• Add capacity (respond quickly to sudden demand)• Enhance communications (e.g. communicate retail demand to raw material supplier)• Improve process and supplier quality• Improve forecasting• etc…

Location of InventoryCentralization –vs- Responsiveness

What are the trade-offs of centralizing of inventory storage versus distributing inventory regionally?• Lower management cost (central)• Possible higher transportation cost (central) • Slower delivery response time to customer (central)• Less chance of stock-out (central)• Better management of demand variability (central)


Managing variability: Let k represent a cost or safety factor for variability:

Then is the cost to manage variability at regional center i, where is the standard deviation of demand at region i.

The cost to manage variance at all regional centers is

If product is centralized, then the standard deviation of the global demand is:

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i

ik

2/1

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ii


Knowing cost to manage variance at all regional centers is:

And cost to manage variance centrally is:

If variance of all regions are the same, then cost of regional – vs- central:

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2)(

iikk

1)( 1

12/1

2

n

nk

kn

k

k

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Location of InventoryDistributing Inventory Through the Supply Chain

Considering a supply chain, where is inventory stored?

Two approaches:• Distribution Requirements Planning (DRP) – Pull Inv.• Allocation Schemes – Push Inv.

WarehouseFactoryRetailer 1

Retailer 2

Retailer 3

Location of InventoryDistribution Requirements Planning (DRP)

General Idea: Retail orders are “pulled” through the system.• Retailers place orders with local warehouses based on demand forecast• Subtracting inventory on hand from projected demand, warehouses then place orders with regional distribution center• Distribution center nets its on-hand and on-order inventory against warehouse orders and then releases orders for the remaining units to the factory• Factory uses current system inventory, demand forecasts, resource availability and costs to develop production schedule (Aggregate Planning).• Excess product inventory is kept at the plant until ordered by the distribution centers.


Considering the above supply chain• Factory ship direct to warehouse and retailer C• Factory produces the product once every four weeks• Warehouse requires one week to process orders.• Delivery to retailer A is immediate• Delivery to retailer B takes one week.

WarehouseFactoryRetailer C

Retailer A

Retailer B


Insert Table 4.5


In the previous example, demand and lead times were all deterministic. In reality, both these values are variable. How would you adjust the rules?

Location of InventoryAllocation Schemes

General Idea: Excess inventory not stored at the factory, inventory is pushed towards retailer.• Produced units are sent to distribution centers in proportion to forecast demand• Example rule: Equalize projected “run-out” time for each center.


Equalize projected “run-out” time for each center.

Insert fig 4.6


Equalize projected “run-out” time for each center.In period 2, 158 units are distributed from factory, with 30 units going to Ret. C and 128 units going to the warehouse.

Here’s why:• Shipment from factory to Ret. C arrives immediately, and must cover 13 units (per. 2)• Shipment to warehouse arrives in period 3, and must cover 58 units for Ret. A (per. 4) and 40 units for Ret. B (per. 5) for a total of 98 units.• 158 units are shipped to cover this 111 unit need, leaving 47 • How to distribute remaining 47? Look at next period require.• Need 100 units are Ret. C (per 3), and 180 units at Warehouse (per. 4) to cover 100 at Ret. A (per 5), and 80 at Ret. B (per. 6). 35.7% requirement at C and 64.3% at Warehouse.• Therefore 35.7% of remaining 47 units allocated to Ret. C (17 units), and 64.3% of 47 to warehouse (30) units.

supply chain management location of inventory general idea: store as little inventory as possible...

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